China Commercial Banking Report Q1 2009

Abstract

The real macroeconomic effects of the credit crunch have already begun to play out in China, and we
expect a continuation into 2009. As anticipated, Q408 GDP data confirmed that the country is far from
immune to the unfolding global recession, with real growth dropping to 6.8% year-on-year (y-o-y). This
marked the weakest outturn in seven years and dragged full-year growth to 9.0%, a sharp decline from the
13.0% recorded in 2007 and the first time since 2002 that the world’s third largest economy had failed to
register double-digit headline growth. With things expected to get worse before they get better, we are
anticipating further grim news from China in H109 and reiterate our below-consensus 5.6% growth
forecast for the year. The banking system will be particularly hard hit, with asset and credit growth likely
to fall both on the back of rising external borrowing costs and declining domestic demand for new loans.
We stress, though, that the key risks in China’s case are for a protracted slowdown and not a systemic
crisis. As such, over a multi-year time horizon, we retain our view that China will be in a better position
to recover.
This report is being written at a time when the global financial crisis – which arose as a result of the
evaporation of inter-bank liquidity – has moved into a new phase. Stock market participants appear –
reasonably – to have taken the view that the policy responses taken by governments, central banks and
multi-lateral institutions will be sufficient to prevent a total collapse of the global financial system.
Instead, stock market participants are focusing on the impact of a near-global recession on the earnings of
non-financial companies.
The number and size of stand-by facilities agreed by the IMF since early October supports our view that,
of the emerging markets whose commercial banking sectors are surveyed by BMI, the countries of
Central and Eastern Europe are those whose economies are most at risk of suffering adverse affects as a
result of the global financial crisis. This is partly because the macroeconomic imbalances are relatively
severe and partly because the Central and Eastern European countries are more directly affected by the
brutal recession that is unfolding in wealthier member states of the European Union.
As yet, it has not been possible to collate hard numbers, for most of the countries whose commercial
banking sectors are surveyed by BMI, that clearly quantify the impact of the global financial crisis on the
banks. As we explain in the section that discusses changes that we are making to the report, we again
include a lengthy essay which attempts to identify the key issues. In essence, in the emerging markets
(and, indeed, the developed countries) of the Asia-Pacific, commercial banks appear to be well placed to
deal with the crisis. The same is, broadly, true of commercial banks in the various countries of the Middle
East and North Africa. Latin America, Chile, Brazil, Mexico and Colombia appear better placed than
Argentina, Venezuela, Bolivia and Ecuador. South Africa’s situation appears to have much in common
with that of Brazil. In contrast, Nigeria faces some of the same challenges as those that confront
Venezuela. The positions of most countries in Central and Eastern Europe, however, are alarming.
From Q209, we will include data that pertains to late 2008 and extend forecasts out to 2013. We will also
incorporate much greater discussion of the various protagonists in each country’s commercial banking
sector and a number of new features. We believe that the figures we compiled in mid-2008 provide
insights as to how the various commercial banking sectors will fare in the current, extremely uncertain,
climate. We have, therefore, left them essentially unchanged.
The figures on the tables above provide a snapshot of the banking sector in China prior to the onset of the
global financial crisis. To place the figures in context, it may be useful to bear in mind certain aspects of
the 59 countries whose banking sectors are currently surveyed by BMI. Across this sample, the median
growth in assets in local currency terms was 21.3% (in Colombia). The median loan growth was 21.6%
(in India). The median growth in deposits was 17.9% (in Brazil).
On their own, the ratios of loans to deposits, assets and GDP mean little. However, they can provide
useful hints when combined with other data. Across the 59 countries, the median loan/deposit ratio is
92.3% (in Greece). The median loan/asset ratio is 56.0% (in Poland). The median loan/GDP ratio was
63.9% in India.
As in previous reports, we include a SWOT analysis for China. We suggest that the two most important
strengths of China’s banking system is that growth can likely be maintained, driven as it is by domestic
demand and the government remaining focused on providing stimulus to the economy. Against this, there
are weaknesses such as the exposure of the economy to the global economic downturn, or the recession,
and the risk of overcapacity in an environment which is clearly slowing in growth.
Since Q108, we have calculated, on a consistent basis, a Commercial Bank Business Environment Rating
(CBBER) for each of the 59 countries surveyed. The CBBER includes an assessment of the limits of
potential returns. It does this by taking into account the size, growth potential and bancassurance potential
of the banking sector, as well as aspects of the economy in 2007. The CBBER also depends on an
assessment of the risks to the realisation of potential returns. This reflects BMI’s assessments of overall
country risk, together with the regulatory and competitive environment.
China’s overall CBBER is 70.5. The banking market structure elements of the limits to potential returns
have, unsurprisingly, a higher score than the country structure elements (87.5 versus 50.5). Conversely,
the banking risks elements of the risks to the realisation of returns have a lower score than the country
risk rating (58.3 versus 70.0).